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Loans to Company Directors

Updated: Mar 24

Loans to Company Directors

In Singapore, generally, directors of companies are not allowed to take loans from the company as stipulated under Section 162(1) of the Companies Act. This does not apply to exempt private companies.

There are, however, some exceptions to this rule:

  • The director is also a shareholder: If the director is also a shareholder of the company, they may be able to take a loan from the company, but only if certain conditions are met. These conditions include:

  • The loan must be approved by a majority of the disinterested directors at a board meeting.

  • The loan must be made on normal commercial terms, meaning that the interest rate and other terms must be similar to what would be charged to an unrelated third party.

  • The company must be able to demonstrate that it is solvent and that the loan will not put the company at financial risk.

  • The company is an exempt private company: Exempt private companies are small companies with fewer than 50 shareholders and no public debt. These companies have some relaxations on the rules for loans to directors, but they still need to comply with certain requirements, such as:

    • The loan must be approved by a majority of the shareholders at a general meeting.

    • The company must maintain a register of loans to directors.

It is important to note that even if a loan to a director is permissible under the Companies Act, it may still have tax implications. For example, if the loan is interest-free or the interest rate is below the prevailing market rate, the director may be liable to pay tax on the benefit they have received.

If you are considering taking a loan from your company, it is important to seek legal and financial advice to ensure that you are complying with all the relevant regulations and that you understand the potential tax implications.

How Bestar can Help

Seek professional advice:

Bestar specializes in corporate governance and tax law in Singapore. We can advise on the legality and potential tax implications of different loan options based on your specific situation.

Ways Bestar is able to help:

1. Compliance Guidance:

  • Understanding the legal landscape: Bestar, as accounting professionals, is familiar with the relevant sections of the Companies Act regarding loans to directors (Section 162(1)). We can explain the exceptions and requirements, ensuring you understand the legal framework before proceeding.

  • Identifying potential red flags: We can review your situation and identify any potential issues with complying with the regulations, helping you avoid legal risks.

2. Loan Structuring and Documentation:

  • Structuring a compliant loan: Bestar has experience in corporate finance. We assist in structuring a loan that meets the legal requirements, including proper approval procedures, market-rate interest, and solvency assessments.

  • Preparing necessary documentation: We can help prepare essential documents like loan agreements, board resolutions, and shareholder approvals, ensuring they comply with legal and accounting standards.

3. Tax Implications and Planning:

  • Tax planning and advice: Bestar has tax expertise, we advise on tax implications of different loan options and help minimize potential tax liabilities.

  • Understanding tax consequences: Bestar, with our accounting expertise, can explain the potential tax implications of different loan options, such as interest deductibility and fringe benefit taxes.

  • Minimizing tax liabilities: We might suggest tax planning strategies to minimize your tax burden associated with the loan, though remember seeking dedicated tax advice is crucial.

4. Procedural Compliance:

  • Meetings and Approvals: As company secretaries are familiar with corporate governance procedures, we can guide you on organizing and documenting board meetings or shareholder meetings required for loan approvals as per the Companies Act (Section 162(1)).

  • Maintaining Records: We can ensure proper maintenance of records related to the loan, including meeting minutes, resolutions, and loan agreements, adhering to company secretarial best practices.

5. Document Preparation and Review:

  • Drafting Documents: While not legal advice, we can help draft loan agreements, resolutions, and other loan-related documents following standard formats and company procedures.

  • Document Review: We can review drafted documents, including loan agreements, for consistency with company policies and relevant regulations.

6. General Support and Communication:

  • Liaison with Stakeholders: We can act as a point of contact for communication with directors, shareholders, and auditors regarding the loan process, ensuring transparency and information flow.

  • Meeting Logistics and Administration: We can assist with logistics like scheduling meetings, preparing agendas, and distributing relevant materials for loan-related discussions.

Contact Bestar today!

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